Setting Up Payroll for a One-Person S Corp

Before the First Payroll Run

Several accounts and registrations need to be in place before you can legally pay yourself. Some take days and some take weeks, so start earlier than feels necessary, particularly with state agencies.

• An Employer Identification Number for the corporation, obtained on Form SS-4
• An EFTPS enrollment for depositing federal payroll taxes electronically
• A state withholding tax account with your state revenue department
• A state unemployment insurance account, which issues your annual SUTA rate
• A completed Form W-4 for yourself, kept on file rather than submitted
• A decision on pay frequency, which determines your payroll calendar for the year

Each Payroll Run

A payroll run is the same set of steps every time. The goal is that the numbers you calculate, the money you deposit, and the figures you report all agree.

• Calculate gross pay for the period from your annual salary and pay frequency
• Calculate federal withholding using the IRS Publication 15-T percentage method and your W-4
• Calculate Social Security and Medicare, both the employee share withheld and the employer share owed
• Calculate state withholding using your state formula
• Produce a pay stub itemizing each amount, with year-to-date totals carried forward
• Transfer net pay to yourself and set aside the withheld amounts for deposit

Deposit Schedules

Withheld income tax and both halves of FICA have to be deposited to the IRS, and the deadline depends on which schedule you have been assigned. The schedule is set from a lookback period, so it can change from year to year. Missing a deposit deadline carries a penalty even when the amount is eventually paid in full.

• Most small employers are on the monthly schedule, depositing by the 15th of the following month
• Larger payrolls fall on the semiweekly schedule, with deadlines tied to pay dates
• The schedule for a calendar year is determined by tax reported during the lookback period
• FUTA is deposited quarterly once the accumulated liability passes the threshold
• State deposit schedules are separate and often on a different cadence

The Filing Calendar

Beyond deposits, several returns are due through the year. Diarize these when you set up the payroll, because the penalties for late filing apply even when no tax is owed.

• Form 941, filed quarterly, reporting wages and federal payroll taxes
• Form 944 instead of 941, annually, but only if the IRS has notified you that you qualify
• Form 940, filed annually for federal unemployment tax
• Form W-2 to yourself by January 31, with Form W-3 transmitted to the Social Security Administration
• Form 1120-S, the S corporation income tax return, with a Schedule K-1 to each shareholder
• State withholding and unemployment returns, on your state schedule

Year-End Items Specific to S Corp Owners

A few adjustments have to be made before the final payroll of the year, because they change what appears on your W-2. Catching them in January is much harder than handling them in December.

• Health insurance premiums for a more than 2% shareholder must be added to W-2 Box 1 wages
• Those premiums are excluded from Social Security and Medicare wages, so Boxes 3 and 5 will differ from Box 1
• Retirement plan contributions are calculated from W-2 wages and have their own deadlines
• Confirm that the sum of your quarterly 941 filings agrees with the W-2 before filing

When to Hand It Off

A single-employee payroll run monthly is a manageable amount of work. The calculus changes once you add a second employee, operate in more than one state, or find yourself missing deadlines. A bookkeeper or payroll service costs less than the accumulated penalties from a year of late deposits, and both are cheap relative to the value of not thinking about it.